Turning Points

"By the Law of Periodical Repetition, everything which has
happened once must happen again, and again, and again -- and not capriciously,
but at regular periods, and each thing in its own period, not another's,
and each obeying its own law... The same Nature which delights in periodical
repetition in the sky is the Nature which orders the affairs of the earth.
Let us not underrate the value of that hint." -- Mark Twain

Current Position of the Market.

Long-term trend - The Dow Jones Industrials may be deviating from their
typical decennial pattern in an election year. Important cycles going into
the Fall could be the reason for this, but one also has to consider the possibility
that the downward pressure from the 120-yr cycle, which is due to make its
low in 2012-2014, has begun to take effect and that October 2007 was the top
of the bull market. This is not yet confirmed and remains a low probability.

SPX: Intermediate trend - It is possible that the intermediate term
correction was completed at 1201. More likely, this is only a counter-trend
rally which may be near an end with the final low in September or October.

Analysis of the short-term trend is done on a daily basis with the
help of hourly charts. It is an important adjunct to the analysis of daily
and weekly charts which determines the course of longer market trends.

Daily
market analysis of the short term trend is reserved for subscribers. If you
would like to sign up for a FREE 4-week trial period of daily comments, please
let me know at ajg@cybertrails.com.

Overview:

"What the indices all have in common is that they are getting overbought
and may be in need of a correction. The poor quality of breadth and the relatively
low volume in this rally are proof of the underlying lack of demand for stocks.
Next week will be critical in determining the course of the short-term trend.
If we cannot extend the move which started on Friday morning, the market
is at risk of making a reversal which will lead to additional consolidation
and perhaps new lows in the weakest indices over the next few weeks."

This was written in the last newsletter and, on the next day, the market did
start a correction which came to an end last Thursday. During this retracement,
the weakest index, the NYSE came very close to its July low, while the strongest,
the Nasdaq 100 had a much needed pullback. By the end of the week, the market
as a whole was attempting to get back into an uptrend. If it succeeds, it will
probably not be for long for a couple of reasons: 1) The correction was not
deep enough to relieve the short-term overbought condition of the market, 2)
Breadth remains anemic.

Perhaps a more compelling reason is that the 6-yr cycle low which is due in
the Fall, is getting closer and closer and will exert increasing downward pressure
on prices.

Finally, oil still has not had a decent counter-trend rally after its 20%
correction, and it will shortly be ready to resist and reverse its downtrend.
In fact, it may already have found a temporary low and is in the process of
testing it.

What's ahead?

Chart pattern and momentum:

The SPX is still in an intermediate downtrend and will continue to be as long
as it stays within the heavy red lines which delineate the parameters of the
intermediate down-channel.

On July 15th, the index found a temporary low at 1201 and started a corrective
uptrend. There is a chance that this upward correction came to an end in mid-August
at 1313. The first retracement stopped on a channel line and produced a 2-day
bounce into Friday. This bounce could become an extension of the rally and
make a new high before it reverses. There is an unfilled projection to about
1220-25, and if Monday sees the SPX move decisively beyond 1302, it would trigger
a confirming projection to the same level.

There are small obstacles that will have to be overcome. Resistance will come
from three different areas: The underneath of the minor uptrend line which
was just broken, the former high of 1302, and the declining internal upper
channel line (red dashes). If the index can get above all that, it will re-establish
its uptrend, and could reach its stated target.

The two indicators at the bottom of the chart are saying that we may already
have made a top, or are close to doing so. The breadth oscillator (lower) has
already given a sell signal by coming out of its channel, but the momentum
index has not. This is negative divergence and not the sign of a strong market.

Cycles

Two cycles are responsible for the current rally. The 2-yr and the 9-mo cycles.
They are going against the bottoming trend of the 6-yr cycle which is getting
very close to making its low. Mid- October seems like a reasonable time frame.

I suggested earlier that we may also be under the influence of a 7-year cycle
whose previous lows would have been 1987, 1994, 2001, and now 2008. Seven years
from its September 2001 low would be 9/16/08.

The 6 and 7-yr cycles could combine to bring about a sharp decline over the
next few weeks which would put an end to the intermediate decline and resume
the bull market uptrend.

Projections:

"The move down from 1440 still has an unfilled projection to 1180 or below.
The rally from 1201 barely reached a .382 retracement on Friday. It may not
go much higher without additional consolidation. A 50% normal retracement
would take it to 1320. Anything less has to be considered weak."

Neither projection has been reached yet. From where the SPX sits, we could
easily first satisfy the upper projection, and then the lower one. As mentioned
above, trading decisively above 1302 would trigger a potential projection to
1320-25.

In my closing comment on 8/19 I wrote "...This favors a little more selling
tomorrow morning to the target zone before we reverse. 1262 would be ideal."

The next day, the SPX printed 1261.16 and reversed. After another day of consolidation,
it started to rally and closed on Friday at 1292.20. During that consolidation,
the Point & Figure chart made a small base which had two distinct phase
counts. The first to 1295 and the other to 1301.

The first was filled on Friday and brought a pull-back to 1284. The second
could be filled on Monday and bring an end to the rally. By stretching the
rules of P&F counting, it would be possible to produce a much less reliable
count to 1325, which would fit with the Fibonacci projection that would be
triggered if the SPX rises above 1302.

Breadth

The daily breadth oscillator peaked in the 4th week of July and has been in
a declining trend ever since, producing a series on negative divergence tops
vs. the SPX price. On 8/18, it finally gave a sell signal and in the last couple
of days it has tried to re-establish its uptrend.

If we are to have a strong continuation of the rally, breadth will have to
be far more positive than it has been over the past month.

Market Leaders and Sentiment

Market strength is represented by the NDX and Russell 2000 which continue
to outperform the SPX, although during the recent correction, they were slightly
weaker. The NQ breadth has also become relatively weaker than the SPX over
the short-term. This is a sign that we are approaching the end of the rally.

The underlying market weakness is best exemplified by the NYSE Composite.
Where is the rally? Mostly in the momentum indicator which is still overbought!
As it corrects, is there any doubt that this index will make new lows?

Sentiment indicators have hardly budged in the past couple of weeks. The short
term is currently neutral and the longer term is still slightly bullish.

Summary

The 6-yr and 7-yr cycles are now very close to making their lows. Until they
do, we cannot have a sustained uptrend, and signs are already appearing which
suggest that the current rally is on borrowed time. This is illustrated by
the momentum indicators of all the indices. They are overbought and are beginning
to roll over.

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The above comments about the financial markets are based purely on what I
consider to be sound technical analysis principles uncompromised by fundamental
considerations. They represent my own opinion and are not meant to be construed
as trading or investment advice, but are offered as an analytical point of
view which might be of interest to those who follow stock market cycles and
technical analysis.